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Client advice records – Are you still following a tick box approach?

Client advice records, or the lack thereof, was identified as one of the trends in complaints contained in the latest annual report of the FAIS Ombud

A tick-box exercise does not help the financial services provider at all, because it does not comply with the requirement in the Code of Conduct that the financial services provider must produce details of the ‘due diligence’ undertaken before the conclusion of a contract with the client. The purpose of this provision is to demonstrate that the advice was preceded by proper research into the client’s circumstances and that the engagement enabled the client to make an informed decision on the choice of financial product.

According to the Ombud there is a growing trend towards standard advice records that provide generic statements such as “I can confirm that all fees and charges were disclosed to me” or “I can confirm that all material terms and conditions of the policy were explained to me and that I was able to make an informed decision” and then require the client to merely tick a box to confirm this.

Whilst the complainant may have signed or ticked such clauses, one cannot expect that the client was able to confirm indeed what was disclosed with regards to fees and charges, based on the client’s knowledge and experience of financial products.

  • The Code requires that concise details be provided of the material terms of the contract to allow the client to make an informed decision. The word ‘material’ is highlighted as an FSP is required to have knowledge of the client’s needs and circumstances and ought to be in a position to identify the terms and conditions, exclusions etc. that would be material to a specific client which would need to be disclosed.
  • The further requirement is that an FSP maintains a record of the advice, provided it is twofold – first and foremost, as the name suggests, a mechanism to record the advice provided, but also as  to demonstrate that the client was placed in a position to make an informed decision.

“The record of advice is also a mechanism that, if used correctly, will stimulate discussion with regards to the important aspects of the financial planning process and ensure that the FSP indeed covers all aspects required to indeed to assist the client in making an informed decision,” the Ombud explains. “These generic records of advice, which appear to have been drafted to assist FSPs to automatically comply with the various sections of the Code, do not assist in either of these two respects and in fact fall short of compliance with the Code and detract from the financial planning process.” In many instances, it is regarded as additional administration, only required to complete the application process.

The record of advice should enhance the financial planning process and provide a more holistic service to the benefit of all parties involved in the transaction.

A FAIS Ombud case study illustrates the trend:

In 2017 Mr C insured his wife and children under a funeral policy. In November 2019, Mr C’s son died. His claim was rejected on the grounds that his son had been over the age of 26 years, which was the maximum age for a child to be covered under the policy.

Mr C complained to the Ombud, saying he had not been told about this condition and had also not been provided with any notice to say that when his son reached 26 years he would no longer be covered.

The broker initially maintained that Mr C was aware of the clause. However, the broker was unable to provide the Ombud’s office with any documentation showing that it had complied with the provisions of the code and that the terms and conditions of the policy had been fully explained to Mr C. In a settlement, the broker agreed to pay out the claim in the amount of R5 000.

Unfortunately, there are far too many examples of inadequate disclosures to clients, particularly at the lower end of the market, where clients often lack the necessary knowledge. A prime example was the sale of retrenchment cover to pensioners. That is the stuff that tarnishes the image of the industry. This calls for industry integrity, not for the need for an Ombud to uncover such transgressions which often leads to one client receiving justice while the practice continues unabated.

Click here to download more about the trends identified by the FAIS Ombud.

Also read: Replacement products – Records of advice should not be prepopulated.

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